Is all this optimism warranted?

December 28th, 2016

The Dow Industrials approaching 20,000 is all the rage on financial channels. Most commentators seem to be more cheerleaders than news reporters. I wonder if their optimism about higher stock prices is misplaced.

During my life time – nearly 50 years in the investment world which includes a five-year stint as a stock broker – I’ve observed that the best time to sell investments is when everything looks great. And, the best time to buy is when things look the worst.

Is all the optimism for stocks justified? Will Trump’s goals of lower tax rates and deregulation spark an economic recovery that will push stocks still higher?

It is ironic that on election night when it became evident that Trump had a chance of winning, that stocks dropped 800 points (in futures trading) and gold went up $70. The world was coming to an end. A businessman instead of a career politician was about to lead the most powerful country in the world.

Now, eight weeks after the election, the Dow is up nearly 11%, which would be a good year’s gain, much less a two-month’s gain.

Trump promises a trillion dollars of infrastructure spending and increased military outlays but has no plans to restrain growth in Social Security and Medicare costs. Usually never mentioned is that much of the federal budget is locked in, cannot be changed. And with higher interest rates, the cost of having $20 trillion of debt will rise.

I hope that Trump’s ideas will result in increased prosperity for Americans, but unintended consequences of government plans often get in the way. Already inflation is raising its ugly head. People living on fixed incomes and those unable to ask for raises will suffer first and the most.

The Congressional Budget Office projects that, without a change in economic policy, the government would add $9 trillion during the next decade to the debt. The Washington-based Committee for a Responsible Federal Budget calculates that Trump’s economic plans would pile on $6 trillion in debt beyond that $9 trillion.

Trump supporters like to compare Trump’s tax cutting to Ronald Reagan’s. In doing so, they fail to mention that under Reagan the national debt grew 186%.

Admittedly, gold and silver’s price action has not been good. But, gold and silver prices trade against the dollar. When the greenback rises, metals prices fall.

Additional money has rushed into the dollar based on all the good things projected by Trump’s proposals. Is the buying of dollars premature? Is it overdone? Who is right, the investors who sold stocks on November 8 or the investors who are now driving stocks to record levels?

Remember, Trump’s proposals must pass Congress. When times comes to for those discussions, much forgotten items such as the national debt, budget deficits, trade deficits, inflation projections, the costs of tariffs, etc. will again be in the forefront of the news.

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